Written by Steven Hansen
The third estimate of ffirst-quarter 2020 Real Gross Domestic Product (GDP) was unchanged at -5.0%.
Analyst Opinion of GDP
The coronavirus lockdown is the reason for the decline – and pushed GDP into contraction. No doubt the U.S. economy is in a recession. From the BEA:
The decline in first quarter GDP reflected the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.
I am not a fan of quarter-over-quarter exaggerated method of measuring GDP – but my year-over-year preferred method showed a significant decline from last quarter.
The market expected (from Econoday):
| Seasonally Adjusted Quarter-over-Quarter Change at an annual rate | Consensus Range | Consensus | Advance Actual | Second Actual | Third Actual |
| GDP core price index – Q/Q change – SAAR | -5.1 % to -4.9 % | -5.0 % | -4.8 % | -5.0 % | -5.0 % |
| Real Consumer Spending – Q/Q change – SAAR | -7.0 % to -6.8 % | -6.8 % | -7.6 % | -6.8 % | -6.8 % |
| GDP price index – Q/Q change – SAAR | 1.3 % to 1.6 % | 1.5 % | +1,3 % | +1.4 % | +1.4 % |
- Headline GDP is calculated by annualizing one quarter’s data against the previous quarter’s data. A better method would be to look at growth compared to the same quarter one year ago. For 1Q2020, the year-over-year growth is now 0.3 % – down from 4Q2019’s 2.3 % year-over-year. So one might say that the rate of GDP growth decelerated by 2.0 % from the previous quarter.
Real GDP Expressed As Year-over-Year Change
The same report also provides Gross Domestic Income which in theory should equal Gross Domestic Product. Some have argued the discrepancy is due to misclassification of capital gains as ordinary income – but whatever the reason, there are differences.
Real GDP (blue line) Vs. Real GDI (red line) Expressed As Year-over-Year Change
This third estimate released today is based on more complete source data. (See caveats below.)
Real GDP per Capita
The table below compares the previous quarter estimate of GDP (Table 1.1.2) with the current estimate this quarter which shows:
- consumption for goods and services declined and removed 4.7% from GDP.
- trade balance declined but added 1.3 % to GDP
- inventory declined and removed 1.5 % from GDP
- fixed investment worsened and removed 0.3 % from GDP
- government spending declined but added 0.2 % to GDP
The following is Table 1.1.2 before the annual revision: [click to enlarge]
z gdp_table.png
What the BEA says about the third estimate of GDP:
With the third estimate, an upward revision to nonresidential fixed investment was offset by downward revisions to private inventory investment, personal consumption expenditures (PCE), and exports
Inflation continues to moderate as the “deflator” which adjusts the current value GDP to a “real” comparable value continues to moderate. The following compares the GDP implicit price deflator year-over-year growth to the Consumer Price Index [this puts both on the same basis for comparision]:
What the BLS says about the revision from the second to the third estimate:
In the third estimate, first-quarter real GDP decreased 5.0 percent from the fourth quarter, unrevised from the second estimate. An upward revision to nonresidential fixed investment was offset by downward revisions to private inventory investment, PCE, and exports. For more information, see the Technical Note. For information on updates to GDP, see the “Additional Information” section below
In the same release, corporate profits data was released showing improving growth.
Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $262.8 billion in the first quarter, in contrast to an increase of $53.0 billion in the fourth quarter (table 10). Profits of domestic financial corporations decreased $37.5 billion in the first quarter, in contrast to an increase of $0.7 billion in the fourth quarter. Profits of domestic nonfinancial corporations decreased $181.8 billion, in contrast to an increase of $53.7 billion. Rest-of-the-world profits decreased $43.5 billion, compared with a decrease of $1.4 billion.
Caveats on the Use of Gross Domestic Product (GDP)
GDP is a market value of all final goods and services produced within the USA where the money is used in the transaction – and it is expressed as an annualized number. GDP = private consumption + gross investment + government spending + (exports − imports), or GDP = C + I + G + (X – M). GDP counts monetary expenditures. It is designed to count the value added so that goods are not counted over and over as they move through the manufacture – wholesale – retail chain.
The vernacular relating to the different GDP releases:
“Advance” estimates, based on source data that are incomplete or subject to further revision by the source agency, are released near the end of the first month after the end of the quarter; as more detailed and more comprehensive data become available, “second” and “third” estimates are released near the end of the second and third months, respectively. The “latest” estimates reflect the results of both annual and comprehensive revisions.
Consider that GDP includes the costs of suing your neighbor or McDonald’s for hot coffee spilled in your crotch, plastic surgery or cancer treatment, buying a new aircraft carrier for the military, or even the replacement of your house if it burns down – yet little of these activities is real economic growth.
GDP does not include home costs (other than the new home purchase price even though mortgaged up to the kazoo), interest rates, bank charges, or the money spent buying anything used.
It does not measure wealth, disposable income, or employment.
In short, GDP does not measure the change of the economic environment for Joe Sixpack and Joe Sixpack’s kid, yet pundits continuously compare GDP across time periods.
Although there always will be some correlation between all economic pulse points, GDP does not measure the economic elements that directly impact the quality of life of its citizens.
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